Friday, September 07, 2012

The Auto Bailout

Or how I learned to live with a billion dollar payoff to the UAW....

So, it seems that the bailout of General Motors and Chrysler is a talking point for the Democrats, where they praise President Obama for rescuing thousands of jobs and keeping our manufacturing base intact.  But let's really take a look and see if this is anywhere resembling the truth. 

First, let's look at the actual costs to the American taxpayer.
$80,000,000,000, or $80 Billion dollars was the cost of the loans and stock purchase, or $30k per worker (Per a Washington Post article).  Additionally, contrary to popular reporting by the lapdog media, the loans have NOT been repaid.  Ally Financial, GM's 'bank' (financing arm) still owes $12,000,000,000 and the 500,000,000 shares of stock that the American people own that was bought at a price of $46/share, and the current price is $22.45 (price at close of 9/6).  So, we're $12,000,000,000 underwater on that purchase.  I guess that the American people should be used to that, given the crash in our 401k's over the last four years, and since there's no possible way that GM stock will come close to that price any time soon, it should just be assumed that we'll be out yet another $12 billion.  GM earnings are disappointing and some 'experts' are actually predicting that GM will need yet another bailout soon if they don't turn things around.  Given that the unions have refused to concede anything as it relates to pensions, healthcare, or other expenses that the company is stuck with, turning things around seems like a long shot.
Chrysler has repaid the loans that they received, but it seems like they are merely an unfortunate asterisk to this entire story, ONLY costing the taxpayers $1.3 Billion after the loans were repaid and stock sold.
Who benefitted and who got screwed?
Well, most obviously the UAW benefitted.  They received not only a bailout which saved their members' jobs, but also were given (yes, GIVEN) a large portion of ownership of GM in preference over bond-holders, which legally is pretty questionable, given the hundreds of years of contract law precedence.  Bond-holders are supposed to be 'secured' creditors, who get paid first during a bankruptcy, but instead, the UAW received their payoff first, then the bondholders got pennies on the dollar.  About $23 Billion was paid to the UAW to fund their pension and healthcare costs for retirees.  Notice that $23 Billion is darn close to the $24 Billion that the American people stand to lose on the entire bailout?  Hmm....This was paid after GM & Chrysler made promises to the UAW that they couldn't keep and owed that money to the UAW trust fund for these expenses.  As part of the negotiations, the government made those payments for them.  So, technically, this wasn't so much an automaker bailout as much as it was a UAW bailout.  Meanwhile bondholders, which include your neighbors, the widows and orphans who benefit from investing in supposedly safe corporate bonds, got screwed.  They received $.20 on the dollar while the UAW received $.47/dollar owed.  And the difference here is that the bondholders are "secured" creditors, while the UAW was not.  This, from a legal perspective is very important, because secured creditors are SUPPOSED to be paid off first, which is why it is supposed to be a very safe investment.  This legal backtrack on the part of the American judicial system will likely affect the bond market for years to come as investors take note of the judicial systems' refusal to back secured creditors over a union.  So, good luck with your bond issuance in the future, unionized companies.

Other people to get screwed?  Dealers.  Especially dealerships which were owned by people who were openly Republicans.  President Obama's 'Auto Team' forced GM & Chrysler to "reorganize" their sales force, closing over 2000 dealerships, costing the country thousands of jobs.  Some of these dealerships had been dealers for 20-50 years, but that didn't matter.  Some of them closed completely, some went to selling other types of cars.  But per the NADA, this action cost the country over 100,000 jobs after it was said and done.  The auto industry saved 400,000 jobs, but then cost 100,000 jobs.  So given standard math, only 300,000 jobs were saved.  At a cost of 80,000,000,000, that seems to be $267k per job. 

For those of us who believe in the actual FREE market, this is inherently wrong.  But for those of you who believe that government should intervene in such situations, this doesn't seem to be quite worth the cost now, does it?  Especially when you consider that we're still going to lose $24 Billion on the deal and GM may end up needing yet another bailout.  And let's face it, it's not like this is an American industry any longer.  Walk through a GM dealership and look at the domestic production percentage of the vehicles in there.  How many are over 50% domestically produced?  Not many. 

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